Kenya’s economy was growing rapidly before the COVID-19 pandemic. The government has
implemented post-pandemic recovery measures to support the stabilization of businesses and
gradual economic growth. The government has also diversified the economy to achieve dynamic
economic growth. As such, improving the access to finance by all business has been a priority
action by the government.
SACCOS provide diversified financial products and services and unlike the traditional banks,
SACCOs offer its members better loan terms such as lower interest rates with less complicated
application procedures, which blends well with SMEs since they operate in a simple ecosystem.
In the recent past, SACCOs not only provide loans to its members (the traditional role of a
SACCO) but also offer saving and transaction accounts to both members and non- members (the
banking role of the SACCO). While the role of SACCOs have evolved over time, the laws
governing the taxation of such bodies have also changed.
The Principle Guiding Taxation of SACCOs in Kenya
SACCOs in Kenya operate under the mutuality principle. This principle is based on the school of
thought that an organization cannot derive income by trading with itself. Therefore, interest income
earned from its members is exempted from tax.
The main source of income for SACCOs is the interest income generated from their members.
However, the question remains, what is taxable when it comes to SACCOs?
The following are the taxable income for SACCOs:
- ✔ 50% of interest income from its non- members e.g. banks and treasury bills
- ✔ The rental Income ( in cases of SACCO earning income from rentals)
- ✔ Capital gains arising from transfer of property
- ✔ Any other income that is taxable
It is a law requirement when preparing the books of accounts as well as tax computations for
SACCOs to classify the income generated and expenses incurred into BOSA or FOSA. For BOSA
(Back Office Service Activity), these activities allow a member to deposit and obtain credit
services (the initial role of a SACCO). Whereas for FOSA (Front Office Services Activities), these
are activities that allow both members and non-members to save and open transaction accounts
(the banking role of the SACCO).
1.3.Previously Decided SACCO Cases
Over the years several SACCOs have found themselves on the wrong side of the law for matter
relating to taxation such cases include:
- Sheria SACCO Vs KRA
- Muramati SACCO Vs KRA
- Nyeri Teachers SACCO Vs Commissioner Domestic Taxes
Sheria SACCO Vs KRA
Sheria SACCO filed an income tax appeal case no. 36B of 2017, which was held to gain no merit
by the tax appeal tribunal. According to an audit conducted by Tax Appeal Tribunal for the year
2011- 2015, Sheria SACCO did not declare income from its FOSA activities for taxation purposes
Therefore, the court ruled that the SACCO had outstanding corporation tax balances from FOSA
activities run by the institution.
Muramati SACCO Vs KRA
Under this case, the Commissioner held that FOSA services were not SACCO main business and
in this case, there were service charges and fee charges in conducting SACCO business and since
the SACCO’s FOSA traded with non-members it was liable to tax on the profit of such trading.
The Tax Appeal Tribunal therefore dismissed the appeal and ruled that the SACCO was liable to
pay additional corporation tax inclusive of penalties and interest.
Nyeri Teachers SACCO Vs Commissioner Domestic Taxes
In this case, the taxable income resulted to the dispute as it was established by the Commissioner
that the SACCO carried out FOSA activities such as holding deposits that earned interest from
non-members. It was therefore ruled that the SACCO dealt with the commercial services under
FOSA activities of Co-operative Societies in general and according to the law, FOSA activities
From the above cases analysis, it is clear that determining the income that is taxable for SACCOs
according to the laws of Kenya, is a major problem for the SACCOs. Therefore, extensive training
is needed on such laws for the SACCOs to avoid the accruing penalties and interests as a result of
defaulting to pay their entire tax obligation amount as expected by the law.